What is cash-out refinancing?

Cash-out refinancing replaces your current home loan with a bigger mortgage, allowing you to take advantage of the equity you’ve built up in your home and access the difference between the two mortgages (your current one and the new one) in cash. The cash can go toward virtually any purpose, such as home remodeling, consolidating high-interest debt or other financial goals.

How a cash-out refinance works

The process for a cash-out refinance is similar to a rate-and-term refinance of a mortgage, in which you simply replace your existing loan with a new one for the same amount, usually at a lower interest rate or for a shorter loan term, or both. In a cash-out refinance, you can do the same, and also withdraw a portion of your home’s equity in a lump sum.

Pros and cons of cash-out refinance

Pros

• You can lower your rate.
• Your cost to borrow could be lower
• You can improve your credit
• You can take advantage of tax deduction

Cons

• Your rate might go up
• You might need to pay PMI
• You could be making payments of decades
• You have a greater risk of losing your home
• You might be tempted to use your home as a piggy bank